Abstract

India is a country characterized by a huge informal sector. At the same time, it is a country where the extent of corruption in every sector is remarkably high. Stifling bureaucratic interference and corruption at every stage of economic activities is one of the main reasons behind high participation in informal and unregulated sectors. For economies characterized by high inequality and poverty, a useful tool for the government to pacify social unrest, is to choose a lower level of governance allowing substantial corruption in the system. Based on a study of states in India, we empirically show that higher corruption is associated with higher levels of employment in the informal sector. Furthermore, our analysis shows that for higher levels of lagged state domestic product, the positive association between levels of corruption and extent of employment in the informal sector is nullified.